Real Asset Chartbook

This Week’s Essential Real Asset Reading

• Japan and the Birth of Modern Shipbuilding: Japan transformed shipbuilding by adopting prefabrication and welding techniques, improving efficiency and speed. With government support and a focus on continuous improvement, Japanese shipyards became leaders in the industry by the 1970s. This success came from innovative methods, lower labor costs, and strong coordination among all parties involved.

• Wind of Change: A little renewable yieldco dumpster diving in Europe. GRP has generated significant cash since its IPO in 2017, but it has recently seen its share price decline, currently trading near an all-time low. Despite this, GRP offers a sustainable dividend yield of about 9.3% and is considered undervalued, with potential for price recovery through market re-rating or acquisition. Analysts believe GRP could be worth between €1.06 and €1.15 per share, making it an attractive investment opportunity.

• Drawdowns and Recoveries: The report examines stock drawdowns, showing that the average maximum drop for top companies was around 80%. It highlights that most stocks do not recover to their previous highs, with only one in six stocks that drop 95-100% returning to peak levels. More significant drawdowns can also lead to higher future returns, but they often take longer to recover.

Thoughts on a Current Market Fascination: The Retail Investor

One factoid that has been making the rounds this week is that the retail trader market share of the US Stock market hit a record high of 36% in late April 2025, more than triple the 10-year average. This factoid comes from a JP Morgan report out on Thursday of last week entitled “Retail Radar: Buy the Dip mentality Paid Off." We dug into this factoid to determine if it provides any signal or is just noise.

Bullish Interpretations

• Retail Flows Have Supported Recent Rallies: In the most recent downturn (April 2025), retail investors aggressively bought equities. JPM estimates that retail portfolios are up roughly 15% since April 8 by “buying the dip”. This mirrors behavior seen since 2009, where rapid recoveries have often rewarded retail dip-buying. The resilience of retail flows, especially into broad index ETFs, has helped markets rebound from volatility shocks. This suggests that strong retail participation can act as a stabilizer or even a bullish catalyst in the short term.

• Liquidity Provision: Studies show that retail investors, especially during institutional risk-off episodes, can provide critical liquidity, cushioning selloffs and aiding in rapid recoveries. Their collective action, amplified by new trading technologies and social media, has increased their ability to move markets, at least temporarily.

• Structural Shifts: Lower barriers to entry, fintech adoption, and the rise of fractional shares have permanently increased retail participation, potentially making markets more resilient to institutional outflows in specific environments

• Further Reading

  • Smart Money Loses to Retail Crowd that Bet on Stock Rebound, Bloomberg

  • Retail's continued buy-the-dip mentality contrasts sharply to stated pessimism, Morningstar

Bearish Interpretations

• Retail as a Contrarian Indicator: Historically, retail investors have tended to underperform the market, often buying near tops and selling near bottoms. Studies show the average retail investor underperforms the S&P 500 by 5–6% annually, largely due to poor timing and behavioral biases. When retail participation spikes to record highs, it can signal euphoria and mark local tops, as seen in past speculative episodes (e.g., meme stocks, dot-com bubble).

• Institutional Selling and Distribution: There is evidence that institutions have been net sellers during this period, reallocating from equities to safer assets. Some market observers suggest that high retail participation may reflect institutions “distributing” shares to retail, using their liquidity to exit positions without causing sharp price declines-potentially a late-cycle or topping pattern.

• Fragility and Volatility: Retail-driven rallies can be fragile. If sentiment shifts or retail flows reverse (due to economic shocks, liquidity needs, or negative news), markets may lack the depth to absorb selling, leading to sharp corrections. Retail investors often lack the risk management discipline of institutions, increasing volatility during downturns.

• Further Reading

  • The Equity Market Implications of the Retail Investment Boom: Study finds that most institutional investors, who hold over 60% of the US equity market, have inelastic demand for equities. Because they respond inelastically to price changes, the relatively small retail sector can substantially impact prices.

Neutral Commentary

• Market Structure and Inelasticity: The growing influence of passive investing and inelastic institutional demand means that even small shifts in retail flows can have outsized price impacts, especially in less-liquid stocks or during periods of low institutional activity. This amplifies both upside and downside moves, making the signal context-dependent.

• No Single-Sided Signal: The current environment is unique- retail flows are strong, but institutional allocations remain high, particularly in tech and quality stocks. This suggests a market with crowded positioning and potential for sharp reversals if either cohort shifts stance.

Closing Thought: Retail buying may have signal value, but the directionality of it is ambiguous and context-dependent:

• In the short run, strong retail flows can buoy markets, especially without aggressive institutional selling.

• In the medium to long run, extreme retail participation often coincides with late-cycle euphoria and can precede corrections, especially if institutions are net sellers and retail sentiment reverses.

• Key risk: If retail flows dry up or reverse, the market may lack sufficient liquidity, increasing the risk of sharp declines